Market Update: Yet more volatility

By Carl Spiess, CFP, CIM, FMA, FCSI, MBA, Director, Wealth Management

This month in the markets, the roller coaster ride continues with extreme market volatility around the world. Markets
have been rising and falling by hundreds of points on a daily basis. At time of writing, the TSX is moving
between 9,000 and 10,000. This volatility reflects
our collective concern as a society for the short-term performance of the global and Canadian economies. The three major
factors affecting these concerns, and thereby the markets, are:

The global credit crisis

The recession in the US

Falling commodities prices

"October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January,
September, April, November, May, March, June, December, August, and February." - Mark Twain, "Pudd'nhead Wilson"

The global credit crisis

Remember when this used to be called the US credit crisis? Since financial markets have become so globally intertwined,
this crisis could not have resided indefinitely in the US. It is showing that it is equally at home in many places around
the world. Yes, even in Canada, though to a lesser extent.

The pressure on US and European financial markets caused by the credit crisis
should ease off slightly as measures are taken to provide liquidity to the lending institutions. Whether the financial assistance around the world will prove to be beneficial in the long run (it has not done much for Japan's
economy over the last decade) remains to be seen but it should reduce uncertainty in the near-term. The US debt, as a
percentage of the overall economy, will be increasing significantly as a result of all the bailouts. However, as can be seen in the charts below,
the US debt is still lower than Japan's or Italy's.

The prudent management of the Canadian financial system has really shone through during this crisis. In fact, Canada's banks
were recently rated the soundest in the world in a survey conducted by the World Economic Forum.

Canadian banks and insurers are much less affected by the crisis due to their solid holdings and lending portfolios and
healthy reserves. Manulife, one of Canada's largest insurance companies, issued a press release earlier this month detailing
its exposure. While, some of its investments have gone down in value, the overall impact on Manulife's
portfolio is manageable. Due to their strong reserves, there is no impact on its ability to meet it's obligations. The impact
has been solely on its own profits. Canada's well-regulated financial system has prevented collapses such as we have seen in the US.

However, no matter how good your credit rating is, if no-one is lending out money, it is hard (or expensive) to borrow. Canadian banks have
had difficulties accessing longer term money in the global market place due to the credit crisis. In response to this lack of
liquidity, the Canadian government announced earlier this month that it would take over $25-billion in mortgages from the banks to free up
money for lending. On October 23rd, the government announced it will also temporarily make extra insurance available to
federally-regulated banks. This will be offered at market cost for those banks that need it to support their wholesale
long term borrowing.

This climate of uncertainty has created a riskier envoronment in which to do business. The chart, below, shows how the spread
between corporate bond yields and government bond yields has widened to reflect this higher perceived risk. The last time
yields were this high, it presented a good buying opportunity for corporate bond funds. We may find the same this time around.

More on the Canadian financial system

The recession in the US

The US is now widely believed to be in a recession. As our largest trading partner, the United States' financial troubles
eventually become ours. Their slow down means a lessening of demand for our goods and services. The
upside here is that with the low value of the CDN$ relative to the US$, our "stuff" is looking like a pretty good bargain
south of the border. Our lower currency value should reduce the impact on our economy. So while the global economy appears to be headed for a mild
recession, the impact on Canada will not be as severe due to the lower value of the CDN$.

Falling commodity prices

Falling commodities prices across the board are of particular concern for Canadians since they form a large portion of our
economy. Looking at one major Canadian export, the price of oil has dropped from its peak in June of $147 (US) per barrel to
under $70. And it is not predicted to change much in the short term.

What does this mean for the Canadian economy? Well, oilsands projects that looked pretty profitable at prices over $100 per barrel are now looking less attractive and some are even being
delayed or scaled back. In one such example, Suncor
announced October 23rd that, due to tightening credit conditions and falling oil prices, it is reducing next year's capital budget
by one-third to $6 billion and delaying the completion of its Voyageur heavy oil upgrader by one year to 2012. It previously cited
$75 to $80 a barrel as the break-even price for oilsands projects.

The silver lining here is, again, the Canadian dollar. There are bargains to be had in Canada for foreign purchasers, relative to the
already low prices for commodities around the world because they can pay in cheap CDN$.

What does this mean for the Canadian economy?

On October 23rd, the Bank of Canada, in its "Monetary Policy Report" predicted sluggish economic performance in Canada through the first quarter of next year.
However, it does predict some
improvement in the situation for the remainder of 2009 and strong performance in 2010 as interest rate cuts (the Bank of
Canada is hinting there will be more) and resolutions to the credit crisis take effect.

More on the Canadian economy

What to do about your investments

I came across a wonderful article by Warren Buffet, founder of Berkshire Hathaway and long time proponent of prudent value
investing. While I've posted a link to the article, below, the long and short of it is, he is moving his cash into equities.
Not just any equities — good, solid companies that he expects to weather the current financial troubles. His point that the
markets have historically bottomed out long before the economy picks up again is a good one. If you're wondering if this
is a good time to increase your investments in the market, do give us a call. While we can't predict where the markets will
go in the short-term, it strikes me that there are
some great deals out there at the moment.

Holdings in short term cash equivalents continue to pose potential problems since the current
bailouts around the globe will likely trigger inflation, eroding the value of those cash investments. As always, your
appropriate asset allocation should be your starting point. If falling values in the markets have left your portfolio a
little bond heavy, it may be time to shift more money into equities. For those that are retired or retiring, we recommend
liquidating as little as possible of your equity investments. Instead, drawing funds from your fixed income holdings has the added
bonus of pushing your asset allocation towards its target mix.

Please don't be a contrary indicator. Many Canadian equity funds are seeing redemptions. While only 1% of long term assets were
redeemed in September, (and preliminary reports suggest even more in October) recent research from Morningstar shows that the last time Canadians pulled significant amounts out
of equity funds was in 2002. In retrospect, this time period proved to be the bottom of the last bear market.

We are here to help you sort this out, so do not hesitate to contact me or any member of The Spiess McGlade Team with
your questions or concerns. Periods of volatility are stressful for investors and we understand that. If it's been a while
since your last portfolio review or you are wondering whether you should be making any changes, just give us a call. We'd be
happy to go through your investments with you and make sure you are on track to achieving your long term financial goals.

Scotia First to Offer Tax Free Savings Accounts

January 2, 2009 is the first day that Canadians can contribute to the new Tax Free Savings Accounts (TFSA). ScotiaMcLeod is pleased to be the first Brokerage firm that is ready to set up your TFSA now. Scotiabank is also the first
major bank to announce the ability to set up TFSAs. ScotiaMcLeod's TFSAs are full "self-directed" accounts (like
your RRSP and non-registered investment accounts) that can hold any number of securities, from GICs and bonds, to stocks and
mutual funds. Scotiabank's TFSAs can hold GICs, Scotiafunds and the popular Money Master daily interest savings account.

We recommend opening a TFSA for anyone who has non-registered investments which are currently being taxed. The account is
especially good as an account for your "rainy day savings" (generally 3 months of income) that many people have on
hand for emergencies. Rainy day savings are usually held in highly taxed interest bearing investments for liquidity so there
is the real potential for some tax-savings by sheltering this money inside the TFSA. However, for long term retirement savings,
the RRSP is generally still preferential since
pre-retirement tax rates are virtually always higher for Canadians than their post-retirement tax rates. In your investment
strategy, your TFSA should have a slightly higher priority that other taxable investments but a slightly lower priority than
other registered account where the government assists with your savings (e.g. RRSP and RESP) and paying down your mortgage.

We will automatically be contacting and sending forms to clients who have non-registered accounts, and whose household
account balance qualifies for a ScotiaMcLeod TFSA with no annual fee, a $50 a year saving. Clients who prefer not to sign
paperwork or who don't need the full flexibility of a ScotiaMcLeod TFSA, are encouraged to open their TFSA online at
www.scotiabank.com.

Scotiabank buys stake in CI

On October 6, 2008, Scotiabank Group announced that we have signed a definitive agreement to make a
strategic investment in CI Financial through the purchase of Sun Life
Financial's ownership stake. Under the agreement, Scotiabank will
acquire Sun Life's 37 per cent ownership in CI through a cash purchase
of $2.3 billion. This definitive agreement is subject to regulatory
approval.

CI Financial is Canada's third largest independently-owned wealth
management company with approximately $62.9 billion in assets under
management. It has an outstanding management team
with extensive wealth management experience and a long track record of
superior performance. CI's excellence in fund management has been recognized with 19 Canadian
Investment Awards over the past seven years including Advisor's Choice
Favourite Investment Fund Company in 2005, and Analysts' Choice
Investment Fund Company of the Year in 2006 and 2007. Two of CI's mutual
funds are included on our recommended list and many of our clients have
included them in their portfolios.

More on the CI Scotiabank deal

CDIC and Assuris Insurance

One of the most common questions we have been receiving is, "What part of my investment account is guaranteed?" Fortunately,
this is also one of the easiest to answer. Here are some general commments:

GICs, which ScotiaMcLeod offers from 12 different issuers, are all guaranteed up to $100,000 by the Canadian Deposit
Insurance Corporation (CDIC). We can have up to $1.2 million of CDIC insurance in each ScotiaMcLeod account.

Regarding annuities and seg funds, Assuris (the insurance companies' insurance) covers up to $60,000 of principal or
$2,000 of monthly income from insurance contracts. It covers 85% on amounts above that.

In addition, the Canadian Investor Protection fund (CIPF) covers cash and investments at brokerage firms like
ScotiaMcLeod.

CSBs and Better Rates on GICs

Canada Savings Bonds (CSBs) are on sale now. The rates, however, are pretty dismal.

Canada Savings Bonds Rates

Canada Premium Bonds

Year 1

2.35%

Year 2

2.50%

Year 3

2.65%

Canada Savings Bonds

Year 1

1.85%

Since the annual inflation as of September 2008 is 3.4%, these rates, in real terms, are negative.

If you are looking for options for the guaranteed portion of your portfolio, GICs usually provide better rates and they
are guaranteed by CDIC (see article above) up to $100,000 per issuer.

If needed, we can select from several issuers to ensure you have full CDIC insurance on amounts greater than $100,000.

It is interesting to note that retail investors can get 4.7% on 5 year CDIC guaranteed investments but institutional investors
(pension funds and large balanced and bond funds) could only find 5 year Government of Canada bonds for 2.38% on Oct. 22, 2008.

More on CSBs and GICs

Scam Emails and Letters

Please be warned, there are a number of scam "phishing" emails going around. These emails try and trick you into
logging into a fake website, in an effort to capture your Scotiabank card number and password. Many of the emails have
official sounding titles, but the poor grammar can often be a clue.

Another "old-school" version of this has been circulating by mail. The Canada Revenue Agency (CRA) is warning
taxpayers to beware of a recent scam where some Canadians are receiving a letter fraudulently identified as coming from the
CRA and asking for personal information. The letter is not from the CRA. A PDF version of the letter is available on the
CRA website:

Go Paperless!

We just wanted to remind you again about the new feature offered to ScotiaMcLeod clients. It's a great way to save a
tree. Your private, searchable online records are available 24/7 through ScotiaOnline. They are available to you days
earlier than those mailed out. All your documents are kept online for 7 years. You can download them to your own computer,
if you wish, for permanent storage. For more information, see:

We found this site that has a very extensive and up-to-date list of phishing emails that are circulating.
If you want to look into a suspicious email you've received, you can search for it in their database. You can
also report such emails to them for investigation.

® Registered trademark of The Bank of Nova Scotia, used under licence. ™ Trademark of The Bank of Nova Scotia, used under licence. Scotia Wealth Management™ consists of a range of financial services provided by The Bank of Nova Scotia (Scotiabank®); The Bank of Nova Scotia Trust Company (Scotiatrust®); Private Investment Counsel, a service of 1832 Asset Management L.P.; 1832 Asset Management U.S. Inc.; Scotia Wealth Insurance Services Inc.; and ScotiaMcLeod®, a division of Scotia Capital Inc. ("SCI"). Wealth advisory and brokerage services are provided by ScotiaMcLeod, a division of SCI. Insurance services are provided by Scotia Wealth Insurance Services Inc., the insurance subsidiary of SCI. When discussing life insurance products, ScotiaMcLeod advisors are acting as Life Underwriters (Financial Security Advisors in Québec) representing Scotia Wealth Insurance Services Inc. SCI is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.

The Spiess McGlade Team is a personal trade name of Carl Spiess and Allan McGlade.